Greenspan-Bush effect on portfolios

Investing tip: 10 business trends in 2001 and beyond

By

DeborahAdamson

WASHINGTON (CBS.MW) - What happened to the real Alan Greenspan? Who was that imposter taking his place?

On Thursday, a man who looked suspiciously like the Federal Reserve chairman spoke before Congress. He talked positively about tax cuts in general, giving a boost to President Bush's tax plan. See full story.

Unless the country was caught in an alternate universe, it was the real Fed chief speaking before Congress. Americans saw a different side to Greenspan, who over the past year said he preferred to use the nation's surplus to pay down the debt.

Read his lips: He now backs cuts in marginal tax rates.

Tax cuts could do "noticeable good" and would not stand in the way of further interest rate cuts, he said. In fact, traders are betting the Fed will reduce short-term interest rates by one-half of a percent when they meet next week -- as indicated by the Fed Funds futures.

Inflation - a longtime a nemesis of the Fed -- is well contained, the chairman said. There's room for both tax cuts and paying down the debt because the surplus turned out to be larger than expected.

These pronouncements were well received by investors, even though Nasdaq has remained weak due to earnings worries.

Greenspan "made it very clear that we're well on track to pay off the national debt by the end of the decade," said Alan Skrainka, chief market strategist at Edward Jones & Co. "Lower interest rates and tax cuts are good for stocks."

This two-pronged strategy for stimulating the U.S. economy was welcome news. Economic growth has slowed dramatically, with the U.S. close to "zero," Greenspan said.

Two quarters of a declining gross domestic product (GDP) - a standard barometer of economic growth that measures the value of all goods and services produced in the country -- define a recession.

Good for stocks

An environment of reduced interest rates and lower taxes should benefit the stock market and its investors, analysts said.

"I think we're going to be positive for the rest of the year," said Steve Todd, publisher of Todd Market Forecast. "It will be a very diversified rally. A lot of stocks have been beaten down."

"The number of issues hitting 52-week highs is the highest it has been in the last three years."
Steve Todd, Todd Market Forecast

Most stocks have already been rallying since October, with the number of issues advancing outpacing the decliners, Todd said.

"The number of issues hitting 52-week highs is the highest it has been in the last three years," Todd said. Investing in an S&P 500 index fund would be a good idea, he added.

Skrainka said he expects retail, technology and financial-services stocks to benefit in this changing economic climate.

As for bonds, the trend toward lower rates is positive near term. But down the road, if tax cuts heat up the economy too much and inflation becomes a threat to growth, the Fed would be forced to raise interest rates -- which would be bad for the bond market.

Monetary vs. fiscal policy

Monetary policy works much faster to rev up the economy and boost the market than tax cuts, which need congressional approval to pass and take time to implement.

By cutting interest rates on Jan. 3, the Fed made it cheaper for consumers and business to borrow money, encouraging expansion and juicing the economy. While it takes about a year for rate cuts to make an impact, a tax cut takes even longer, analysts said.

"Greenspan doesn't want us to spend our way into another deficit," he said. "Don't underestimate the politicians' ability to spend."

Investing tip:

Deutsche Bank Securities' chief investment strategist Ed Yardeni sees 10 major business trends for 2001 and beyond: A globally competitive economy, a revolution in innovation, continued growth in the wireless and Internet markets, use of technology to increase corporate productivity, growth in outsourcing, a more open market in China, deflation, aging population, more mergers and acquisitions and a boost in consumer spending. He urges investors to invest in companies that are well positioned to capitalize on these trends.

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